The history of Dollar Exchange Rate
In the beginning, there was nothing known as an official exchange rate. Instead, gold was in use for fixing the currency values of the countries. It was up to the governments to determine the cost of converting an ounce of gold into their currency. For exchanging pounds for dollars, people had to buy gold in Britain and then transport it to the United States. The person would also have to bear all the costs which this transport would entail. Only then was he able to sell the gold for what its worth would be in dollars.
Hence, even though there were not any official exchange rates as such, it depended on the price of gold within the two countries to decide the number of dollars which one could get for the pounds. It came to be the basic principle of the Gold Standard. Countries, however, have not always followed the Gold Standard. The system has gone through numerous variations. One of them is to peg a currency to another. However, when this kind of link gets removed, leading to free trading, the rates would differ significantly because the demand for every currency differs.
Pound Coming into the Picture
It was in the eighteenth century when the pound got fixated to a Gold Standard. At first, Britain abandoned it but went back to it in 1821. In 1914, at the outbreak of war, the export of gold got certain restrictions, and Britain went back to inconvertible paper money. This was the money that could not be converted into gold and vice versa. This led to a ‘free market’ when it came to currency.
The pound experienced specific stability till 1919 wherein the pound was worth approximately $4.70. Soon after, the dollar value dropped and what followed was a typical variability of the unpegged currency. In 1925, Britain re-adopted a certain kind of Gold Standard where the relative values of gold in two countries determined the £/$ rate. The rate became fixed at approximately $4.87.
What Happened Next?
As compared to the value that had been over the previous decade, the pound’s value was pretty high. This put the balance of payment of the UK under stress, creating a run over the pound. Numerous measures were taken to attempt at preventing economic collapse. The United Kingdom government also went on to borrow money from Paris and New York. Ultimately, it was in September 1931 when the country finally had to leave the Gold Standard. The floating pound saw a rapid fall to approximately $3.69.
However, it only took a little more than a year to recover the confidence in the pound. It resulted in putting America under pressure, and in 1933, the dollar was devalued. On the other hand, the pound raised to its highest value ever. It was so high that one could buy $5 with one pound in 1934.
The Impact of War on the Pound
By 1937, all the countries across the globe had given up the Gold Standard. For several years, the £/$ rate kept hovering around the $5 marker. However, the impending crisis of 1939 made the value of the pound drop as well. Matters became worse at the onset of war. During World War II, it took only a month for the rate to drop from $4.61 to only $3.99. It was in March of 1940 when the British government decided on pegging the value of the pound to the dollar at $4.03, and it stayed at that rate for a couple of years. However, a “free market” of currency was running parallel, which saw the pound’s rate dropping to $3.27 during May in the same year. Although in September, it settled back almost close to its official rate. (See Why did China devalue its currency in August 2015?)
The Rate of a Pound Now
To know the pound’s exact rate in your country, you must seek help from your local numismatist on the price they usually charge for one shilling coin, a pound note or coin. It is important to keep the dates and certain conditions in mind. Originally, a shilling used to be 5 per cent of the pound. You can draw the analogy of a nickel here. One nickel usually equals 5 cents. A shilling used to be 12 pence. But the shilling coin turned out to be 5 new pence. Pence would refer to actual coins, pennies or amounts. One UK dollar used to be 5 shillings or a crown when it was a coin. In those days, you would get half a crown for half a dollar. If you want to know how much you can earn by selling a shelling today, well, the answer is “it depends”. In exchange for a shilling today, you will get whatever a dealer of antique coins thinks is the market price of the shilling.